Required minimum distributions may increase your tax bracket in retirement, but there is a way to help manage your tax exposure and help great causes: qualified charitable distributions (QCDs). At 72, you are required to take distributions from traditional IRAs to ensure you are not stockpiling the money, and that Uncle Sam gets his cut. QCDs are your ticket to reducing your retirement income taxes.
What exactly is a Qualified Charitable Distribution?
A qualified charitable distribution satisfies your required minimum distribution from your IRA directly to a qualified charity. Fortunately, the money gifted with a QCD does not count towards you adjusted gross income as it would with a regular RMD.
How can a QCD save you tax money?
They reduce your adjusted gross income but fulfilling the RMD requirement without needing to be reported as income.
How does a QCD work?
You instruct the custodian of your account to directly pay the RMD as a QCD to a qualified 501(c)(3) charity.
Are there any rules or qualifications for QCDs?
There are rules, but they are straightforward:
- You must be 70 ½
- To have the QCD count the funds must come from your IRA by your RMD deadline. And for most that is the last day of the year.
- Whether one big contribution or smaller ones, QCDs have an annual max of $100,000 per individual. Meaning, married folks can donate up to $200,000.
- QCDs cannot exceed more than what you owe in taxes or qualify for a refund.
- IRA contributions may reduce the amount for QCD you can deduct.
Who can make QCDs?
Anyone with a traditional IRA who is over 70 ½ can make qualified charitable distributions. Note: QCDs only apply to IRAs and not 401(k)s, 403(b)s, SIMPLE, or SEP IRAs.
What charities can receive a QCD?
For tax purposes, the IRS has a defined list of organizations that can receive QCDs. Their list is here.
How do taxes work with QCDs?
Normal required minimum distributions must be reported and are taxed. No federal or state withholding tax is made on distributions to qualified charities.
Using IRS For 1099-R you report your QCD as a normal distribution. However, please note, this only works on IRAs that are not inherited. Distributions donated from inherited IRAs need reported as death distributions.
Though your QCD is not taxed, you cannot claim it as a charitable tax deduction (the IRS does not approve of double dipping). When you make the QCD make sure you get donation acknowledgement for your records.